How to Add Sales Tax to an Invoice, Including Discounts and Shipping

Open the free invoice generatorDownload the sales tax invoice worksheet (PDF)

The rule in one line

Tax is charged on what the client actually pays for the taxable items, worked out once for each rate, and shown separately from the price. Everything else in this guide is detail on that line: what counts as "actually pays" when there is a discount, what happens when only some items are taxable, and whether shipping counts.

A word on scope. In the US, sales tax is set by states and often by cities and counties, so the rate and what is taxable depend on where the sale is taxed. In the UK, Europe, Australia and many other countries it is VAT or GST, set nationally. The arithmetic below is the same for all of them; the rates and the rules about which items and charges are taxable come from your own tax office, so look them up there.

A worked example, to the cent

A small studio sells 3 framed prints at $40.00 each, which are taxable where it sells at 8.25%, and 2 hours of design time at $75.00, which in this example is not taxable. The client gets a 10% discount, and shipping is $12.00.

Two things are easy to get wrong here. First, the tax is on $108.00, not $120.00, because the discount reduced what the client pays for the prints. Second, the tax is only on the prints; charging 8.25% on the whole $243.00 would have added $20.05 instead of $8.91.

Showing tax per rate is also what VAT rules ask for. HMRC's VAT guide (Notice 700) lists, for each description on a VAT invoice, the rate of VAT and the amount excluding VAT, plus the total VAT. One tax line per rate does that.

Is shipping taxed?

It depends on where you sell, which is why no generator can decide it for you. Washington's Department of Revenue, on delivery charges, says retail sales tax applies to delivery charges on products that are themselves subject to sales tax, and that when the goods are exempt the delivery charge is exempt too. Other states treat separately stated delivery charges differently, so check your own state's revenue department before your first shipped order.

In the free invoice generator, the Shipping box is added after tax and is never taxed. If delivery is taxable where you sell, leave that box empty and add shipping as an item line with the same tax rate as the goods instead.

Step by step in the free invoice generator

1. Confirm the rate and what it applies to

Look up the rate on your state or tax office's site, and which of your products and services are taxable. Write both down on the worksheet with this guide.

2. List every item

Open the free invoice generator and add each product or service as its own line with a quantity and unit price.

3. Choose how tax applies

Under Tax, discount and shipping, choose One rate on everything if every line is taxed the same, or A rate on each item when some lines are exempt or at a different rate. Give the tax a name your client recognises, such as Sales tax, VAT or GST, and set Document title to "Tax invoice" if your tax office requires those words.

4. Apply any discount

Enter the discount as a percentage. The generator takes it off the subtotal and works the tax out on the discounted amount for each rate, rounded once, in whole cents, so the lines always add up.

5. Decide where shipping goes

Not taxed where you sell: use the Shipping box. Taxed: add it as an item line with the goods' rate.

6. Check the tax lines

The preview shows the subtotal, the discount, one tax line for each rate and the total. Check them against the worksheet once, then trust the arithmetic on later invoices.

Rounding, tax names and tax-exempt clients

Rounding is where hand-made invoices go wrong by a cent. If you round the tax on every line and then add the lines up, the total can differ from tax worked out once on the whole amount at that rate. The free generator works in whole cents and rounds the tax once per rate, so the tax line always matches the subtotal it is based on. If your tax office requires per-line tax instead, check its guidance and add the tax to each line yourself.

Name the tax the way your client will recognise it: Sales tax in most of the US, VAT in the UK and Europe, GST in Australia, New Zealand and Canada, sometimes with the rate in the name ("GST 10%"). If you are registered, put your registration number in your business details so it appears on every invoice.

Some clients are exempt, for example a reseller buying for resale or a qualifying nonprofit, depending on your state's rules. When they give you an exemption certificate, keep a copy and set the tax to No tax or 0% on their invoice, with a note of the certificate in the notes.

Saving rates so you never type them again

The free generator remembers your last settings in your browser. If you invoice often, saved tax rates help more: in Fynl you set your rates once in invoice settings (the video above shows the screen), pick them per line, and the invoice goes out as a link your client pays online, with reminders before and after the due date. The Starter plan is $49 a month.

For the rest of the invoice, read how to make an invoice for freelance work; for the due date, which payment terms to use. Every free tool is on one page.

Questions people also ask

Sources

• Washington State Department of Revenue — Delivery charges
• HMRC — VAT guide (VAT Notice 700), section 16.3
• GOV.UK — Invoices: what they must include